Telangana HC Restores DBS Technology Services' Tax Deduction Claim, Says Technical Lapse Cannot Prevail

The Telangana High Court on 3 July held that the Income Tax Department cannot reject a genuine claim for deduction on the sole ground of a technical or procedural lapse if the taxpayer is otherwise entitled to the benefit.

A Division Bench of Justices P. Sam Koshy and Suddala Chalapathi Rao set aside the order rejecting the deduction claimed by DBS Technology Services India Private Limited and directed the Assessing Officer to reconsider the company's claim in accordance with law. The judges held:

"..rejecting the claim of the petitioner to extend the said benefit under Section 10AA of the Act, by not accepting Form-56F, solely on the ground that system being operated by the Centralized Processing Center and there is no provision for issuance of notice since it is operated by the Centralized Processing Center, is neither proper nor legal, and as aforesaid rejection on mere technicalities should not deprive the legitimate right of the petitioner/assessee..."

DBS Technology Services India Private Limited, a Special Economic Zone unit engaged in technology and product support services, filed its income tax return in November 2019. The company had obtained the audit report required for claiming deduction under Section 10AA of the Income Tax Act, which grants tax benefits to eligible Special Economic Zone units, before filing its return.

However, it inadvertently failed to upload Form 56F, the prescribed audit report for claiming the deduction, along with the return. The company uploaded the form after discovering the omission.

The Income Tax Department rejected the deduction. It said the Centralized Processing Centre, which processes income tax returns through an automated system, could not issue a fresh notice or reconsider the claim after the return had been processed.

The Court rejected the Department's stand. It held that the limitations of an automated system cannot defeat a taxpayer's legitimate claim. It observed that the Centralized Processing Centre was a "man made procedure" and that even if the automated system could not process Form 56F, the authorities ought to have verified the form, taken it on record and extended the benefit if the company was otherwise eligible.

It also noted that the company had received the same deduction in earlier as well as subsequent assessment years. The Bench held that the Department should maintain consistency where the taxpayer continued to satisfy the statutory conditions for claiming the benefit.

Accordingly, the High Court set aside the Department's order and directed the Assessing Officer to examine Form 56F and decide the company's claim for deduction afresh in accordance with law.

For Petitioner: Not mentioned

For Respondent: J.Sunitha, Senior Standing